{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

m07-part2 - PART II[50 PART II To be answered by students...

Info icon This preview shows pages 1–16. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
Image of page 11

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 12
Image of page 13

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 14
Image of page 15

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 16
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: PART II [50%] PART II To be answered by students from Professor Pesando’s section (L0101) Answer ALL questions. I. (8 points) Consider a closed economy with a fixed price level, in which the following relationships hold. C = 1000 + 0.8Yd I = 500 G = 1,300 T = 1000 + 0.25Y a) What is the equilibrium value of national income (Y)? If national income were below this level, how would firms respond? Why? b) If the full-employment level of output is $50 million higher than the equilibrium level from part (a), should autonomous taxes be increased or reduced in order to move the economy to fill-employment? Explain your answer. c) By how much must autonomous taxes be changed in part (b), in order to achieve filll employment? II. (10 points) A monopoly has typical cost and revenue curves and is earning economic profits. a) In an appropriate diagram, illustrate the price that the monopolist would set and the quantity of output that the monopolist would produce. Is this level of output allocatively efficient? Explain your answer. b) Suppose that the monopolist can perfectly price discriminate (i.e. charge each customer the maximum price that the customer is willing to pay). What would happen to output? to allocative efficiency? Illustrate your answer with an appropriate diagram. c) Assume that the monopoly charges all customers the same price. The government decides to break up the monopoly, by forcing the company to divide itself into many small, competing firms. What will happen to price? To output? Illustrate your answer with an appropriate diagram and explain why the profit maximizing level of output changes once the monopoly is broken up. Page 14 of 27 III. (9 points) The market for steel is perfectly competitive. The marginal (and average) cost of producing steel is constant, at $1,500 per tonne. The demand curve for steel is as follows: Price mer tonne} Quantity Demanded (tones) 500 100 1000 90 1500 80 2000 70 2500 60 What is the market price of a tonne of steel? The quantity bought and sold? Illustrate your answer with an appropriate diagram The production of each tonne of steel releases harmful smoke into the atmosphere. This environmental deterioration is estimated by economists to equal $500 for each tonne of steel produced. What is the allocatively efficient price and level of output for a tonne of steel? Explain and illustrate with an appropriate diagram. If the government imposes a lump sum tax of $ 1 0,000 on each firm, will the level of output in the steel industry he allocatively efficient in the short run? Why or Why not? IV. (15 points) Explain whether the following statements are True, False, or Uncertain. All points are awarded for the explanation. 8) b) d) In 2006, the interest rate in Canada is 4%. Twenty-five years ago, in 1981, the interest rate was 20%. As a result, borrowers in 2006 are better off (and lenders are worse ofl) than 25 years ago. When there is a recessionary gap, labour unions should try to increase wages, so workers have more income. The higher income will increase workers’ consumption and shift the AD curve to the right and close the recessionary gap. Frat is maximizing his utility by buying 6 pints of beer and 3 slices of pizza a day. Beer costs $4 per pint and a slice of pizza also costs $4. The marginal utility of the third pizza slice is 8. We can conclude that the marginal utility of Frat’s third beer is 16, because he consumes twice as much beer as pizza. You have an early economics text, which you bought for $10 three years ago while you were in high school. It turns out that this early text is now valuable. Two years ago, it could have been sold for $50. Today, it can be sold for $75. If you decide to give the book to a friend, the opportunity cost of doing so is thus $85. Page 15 of 27 You buy a concert ticket in advance and pay a reduced price of $50. Unfortunately, when you arrive at the concert, you discover that you lost the ticket. As planned, you took a taxi to the concert and the taxi cost $20. The cost of the concert ticket at the door is $60. If you have the finds, you should buy a new ticket. V. (8 points) In a particular year, the unemployment rate in Canada is equal to 10 percent and thus exceeds the natural rate of unemployment (full-employment), which economists estimate to be an unemployment rate of 6 percent. a) b) Why is the natural rate of unemployment not zero? Explain. If the government chose to use monetary policy to increase aggregate demand, what would happen to: 1. the interest rate? 2. the foreign exchange value of the Canadian dollar? 3. the level of exports and imports? If the government chose n_ot to pursue an expansionary monetary policy, would the unemployment rate remain at 10 percent over the long- ? Explain your answer. Page 16 of 27 PART III To Be Answered by students in Professor Hare’s Section L0201 Use a Separate Exam Booklet Each for Section A and for Section B Section A [15 marks] Answer Question 1 in a separate Exam Booklet 1. “Oscar knows that the current emphasis on technological change, innovation and productivity growth started fifty years ago with the seminal work of Bob Solow. Oscar reads the contributions of Lipsey, Easterly [on Solow], Krugman, Sharpe and William Lewis’ recent work [The Power of Productivity .” “Oliver reads the most recent Report from Ontario’s Institute for Competitiveness and Prosperity [March, 2007]. In this Report, Canada’s per capita real GDP is $9,200 lower than in the United States in constant 2005 Canadian dollars. The Report indicates that the ‘prosperity’ gap [standard of living gap] has been widening for many years. As a result of this widening of the ‘prosperity’ gap, Canadians have lower standards of living; workers have lower real wages and the government has lower levels of tax revenue. The Report recommends that Canada work to reduce this ‘prosperity’ gap to $3,300 by 2020 with policies which would increase levels of labour productivity in Canada.” Reguired: Write an essay on the topic of the importance of technological change, innovation and productivity growth which addresses the following issues: a. present an analytical account of the key findings in the Solow model [as summarized in lectures and by Easterly]; b. why is productivity grth the only way, in the long run, for a country to increase its standard of living [analyzed by Krugman]; c. what is the essence of the contribution by Lipsey in his 1996 Benefactors’ Lecture on technological change; d. identify the key findings in the thirteen year McKinsey study headed by William Lewis; e. comment on the Ontario Institute’s convergence proposal as stated above; f. offer two significant suggestions for policy initiatives which would work to reduce the ‘prosperity’ gap identified by the Ontario Institute. Page 17 of 27 Section B [35 marks] Answer Section B in a Separate Exam Booklet Answer FIVE out of SEVEN Questions in Part B [7 marks each] Indicate on the Outside of Your Exam Booklet Which Five Questions You Answered 2. Assume that the following conditions hold in an economy: Products: computers and rickshaws Factors: capital [K] and labour [L] Factor intensity: computers are capital intensive and rickshaws are labour intensive Technology: convex isoquants and constant returns to scale in both industries Assume that a capital-intensive innovation occurred only in the computer industry. Assume further that factor prices do not change as a result of this innovation. Required: a. Using an isoquant diagram to assist in your explanation, show what happens as a result of this innovation in the computer industry and comment on Alexander’s statement: “As a result of this innovation in the computer industry, the budget lines would become steeper, the expansion path would have a higher capital-labour ratio and labour productivity [output per unit of labour input] would decrease.” b. “Colleen suggests that because of the innovation in the Edgeworth—Bowley production box, the contract curve [efficiency locus] would not change.” Do you agree? Use an Edgeworth- Bowley box diagram to support your explanation. c. “Finally, Natasha suggests that because of this innovation, the production possibilities curve would shift totally outwards.” Do you agree? Use a PPC curve diagram to support your explanation. 3. “Ryan spends all his disposable income on shark steaks [x-axis product] and chicken wings [y-axis product]. The price of shark steaks increases. It is known that Ryan has a negative income elasticity for shark steaks and that his substitution effect would always be greater than his income effect. Shannon, Ryan’s fi'iend, suggests that the following would occur when Ryan maximizes his level of consumer satisfaction after the price increase: Ryan would purchase more units of shark steaks; the income consumption curve would be negatively sloped and the demand curve for Ryan for shark steaks would have a positive price elasticity of demand [formula calculation]. Rmuired: Position, consumer indifference curve diagram and explanations. Page 18 of 27 4. A perfectly competitive industry is in short run equilibrium with “11” identical firms. Each firm is initially making normal profits. Material costs decrease such that the average variable cost curve for each firm decreases by exactly $2.00 per unit of output. “Sean analyses this situation and concludes that the industry output would increase; the industry price would fall by exactly $2.00; each firm would produce a larger output and make economic profits.” Required: Your position, a set of carefiilly labelled industry/firm diagrams and explanations. 5. A perfectly competitive industry is in long run equilibrium with initially “11” identical firms. The industry has an increasing cost long run supply curve. The price of a substitute product decreases. “Dillon suggests that this industry shock would result in the following impacts: the industry output would decrease; the industry price would increase; each firm must produce the same output and some firms may leave the industry.” jouired: Your position, a set of carefully labelled industry/ firm diagrams and explanations. 6. Write short analytical notes on each of the following two situations: a. whether marginal cost pricing would eliminate the allocative distortion for a pure monopolist in the long run. The average revenue curve is to the right of the minimum point of the monopolist’s average total cost curve; b. whether an oligopolist, with a kinked demand curve, would wish to change its price and output if material costs were to increase. Note: Use a carefully labelled diagram to assist your explanations in each part. 7. Suppose that an industrial economy, like Canada, has too high a level of unemployment with price stability. “Timothy takes the position that monetary policy may not be very effective in reducing the level of unemployment.” Required: a. explain why the transmission mechanism could show that an ‘easy money’ policy by the central bank may not be able to reduce unemployment significantly; b. explain why a liquidity trap may occur and why it would not allow monetary policy to be successfill. In your explanations, use the transmission mechanism diagrams to support your answers. Page 19 of 27 8. Assume that a hypothetical economy had the following behavioural equations: C = 2,000 + 3/4 Yd Id = 400 + 1/5 Y G = 700 X=500 M=200+1/10Y T'=1/3Y Transfer payments and corporate saving are initially zero. [There is no need to compute the equilibrium level of Y.] a. Calculate the value of the spending multiplier in the usual manner; b. Suppose that the government was to introduce an autonomous tax of 800 units and then the government was to spend 600 units of increased government revenue on domestically produced computers and 200 units of the increased government revenue on imported military equipment. Calculate the impact of the tax and, separately, the impact of the two types of government spending. What is the overall impact on Y? Show all your work; c. Return to the original level of equilibrium. Suppose that the fill] employment level of Y was 1,200 units higher than the initial equilibrium. Again, there is no need to compute the initial equilibrium value of Y. Now the government wishes to introduce an autonomous increase in transfer payments to bring the economy to fi111 employment. Calculate the increase in autonomous transfer payments necessary to bring the economy to filll employment. Show all your work and use an Aggregate Expenditure diagram to support your answer. Page 20 of 27 PART IV To be answered by students in Professor Carr’s section (L0301) ANSWER ALL QUESTIONS. Section I (25 Marks) 1. (13 Marks) Recently in Ontario gasoline refinery capacity was significantly reduced by a fire in an Ontario refinery owned by Esso and refined gasoline prices have increased by over 20¢ a litre for gasoline fi'om Esso which suffered a reduction in refinery capacity and fiom gasoline fi'om the other refinery companies which did not suffer any reduction in refinery capacity. a) (4 marks) Does the increase in gasoline prices for all refineries indicate that the refinery industry in Ontario is not a competitive industry? Explain. b) (3 marks) If the refinery industry were competitive, what affect would a fire in the Esso refinery have on price and quantity? Explain. c) (3 marks) Over the last three or four years the price of crude oil has increased from $12US a barrel to just under $70US a barrel and has since fallen to the $60US range. Does the increase in world crude oil prices indicate that an effective oil cartel operates for the whole world? Explain. d) (3 marks) Given the fact that Canada is a net energy exporter, is the increase in world crude prices harmful to Canada. Explain. 2. (12 Marks) Consider a closed economy with a fixed price level, in which the following relationships hold: 20 + .80 Yd 8 40 5 + .25 Y C I G T H II Where C = consumption, I = investment, G = Government expenditures, T = taxes, Yd = disposable income, Y = real national income a) (3 marks) What is the equilibrium value of national income (Y). b) (3 marks) If investment were to increase by 5, what is the increase in the value of national income (Y). c) (6 marks) If government expenditures were increased by 10 units and autonomous taxes increased such that the final increase in taxes will also be 10 units (ie. the budget stays at the same level of balance), what will be the increase in income? Explain. Page 21 of 27 Section II (25 Marks) Answer the following questions TRUE, FALSE or UNCERTAIN. Give a brief explanation of your answer. Marks are given entirely for the explanation. 1. In 2006, the interest rate in Canada was 4% and twenty—five years ago, in 1981, the interest rate was 20%. As a result, borrowers in 2006 are better off and lenders are worse off than 25 years ago. 2. Frat is maximizing his utility by buying 6 pints of beer and 3 slices of pizza a day. Beer costs $4 per pint and a slice of pizza also costs $4. The marginal utility of the third pizza slice is 8. We can conclude that the marginal utility of Frat’s third beer is 16, because he consumes twice as much beer as pizza 3. I John invests $20 million to start a computer sofiware firm. His revenues equal $10 million per year. The salaries of his programmers equal $8 million, the cost of material is $1 million and his rent is $0.4 million. Clearly, this firm is profitable and John should stay in business. 4. Since in a closed economy, the national income accounting definition of national income (Y) equals consumption (C) plus investment (1) plus government expenditure (G); therefore the greater is government expenditure (G), the greater is national income (Y). 5. Suppose a monopolist is faced with a linear demand curve for its product and suppose the monopolist is maximizing total profits. If the monopolist were to lower its price, total revenue must increase. Page 22 of 27 PART V To be answered by students from Professor Wolfson’s section (L5101) DO 2 QUESTIONS IN PART A AND 2 QUESTIONS IN PART B (Each question is worth 12.5 marks, for a total of 50 marks) PART A DO 2 OF 3 QUESTIONS Question One 1. Fidelia consumes just macaroni and cola. Macaroni is an inferior (but not Gifi‘en) good and cola is a normal good. The price of macaroni is $2 per unit and the price of cola is $1 per unit. Her income is $150 per month. a) What is the equation of Fidelia’s Budget Line? What is her opportunity cost of consuming one more unit of macaroni? b) She is currently consuming 50 units of macaroni (X-axis). Show her initial equilibrium on an indifference diagram, labelled as Point A. What is the value of the Marginal Rate of Substitution at the equilibrium point? c) A new research study becomes widely available; it shows conclusively that cola contributes to tooth decay. As a result, Fidelia reduces her consumption of cola. On the diagram, show her new equilibrium point, labelled as Point R (for research result). Briefly state what has changed on the diagram, if anything, and why. d) Forget the new research and go back to the initial equilibrium at Point A. Now the price of macaroni rises to $3. Using a new diaggtm, show the oroginal Point A and the new equilibrium as Point B. Also show the Substitution Effect and Income Effect of this price change. e) Using a related diagram, draw Fidelia’s demand schedule for macaroni. Question Two [N ote that there are two different parts to Question 2] 2.1 Emily is the only seller of hot dogs at the local hockey arena. Her fixed cost is $100 per game. Her Variable Cost Schedule is given by TVC = $2Q. The demand schedule at a typical game is P = 98 — 2Q. a) Calculate these profit-maximizing values: quantity, price, consumer surplus, profits. b) Now Emily’s grandmother, a hockey fanatic, decides to give her $100 for every game, irrespective of the number of hot dogs sold. With that in mind, draw a fully-labelled diagram to show her profit-maximizing position. Be sure that values for quantity, price, profits and consumer surplus are shown clearly. Page 23 of 27 2.2 Consider North Country and South Country which both produce radios and televisions, using labour input only. North requires 10 units of labour to manufacture 1 radio and 20 units of labour to manufacture 1 television. South requires 60 units of labour to manufacture 1 radio and 30 units of labour to manufacture 1 television. Trade can take place with no transportation or transaction costs. a) Which country could be described as the “low labour productivity” country? Why did you select that country? b) If trade commences, what good will that country export? Why? c) What are the limits to the “terms of trade”? d) North has 1000 units of labour and is currently producing 50 radios. Show this point on its production possibility curve, labelled as Point N. Show a point of possible consumption after it engages in trade and exports 10 units. Label this as point T. Question Three 3. Corn is produced by a constant cost, perfectly competitive industry which is initially in long-run equilibrium. Each firm has traditional U—shaped cost curves. a) Use interrelated diagrams to show the initial equilibrium for a representative firm and the corn industry. (Use subscripts P1, Q], m etc.). What are the profits of each firm? b) Now suppose that producers form a cartel that sets quantity limits for each firm. What benefit for each producer is the cartel designed to achieve? Explain the quantity that should be established for each firm to maximize that benefit. Using your diagrams, show all the elements of this solution, using P2, Q2 etc. c) How might a single individual producer take optimal advantage of the situation created by the cartel? What if every producer followed the same strategy? (Answer with brief statements; do NOT add anything to your diagrams.) d) If the cartel is effective, what concern arises for the members of the cartel in the long @? (Answer with brief statements; do NOT add anything to your diagrams.) Page 24 of 27 PAR...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern